The following points will highlight the six main remedies for controlling business cycles of a firm. The remedies are: 1. Monetary Remedies 2. Cyclical Fluctuations 3. Increase of Buying Power 4. Direct Controls 5. Stabiliser 6. Forecasting.
Remedy # 1. Monetary Remedies:
Economists who believe that monetary causes underlie business cycles, suggest that banking policy should be so directed as to eliminate variations in the volume of credit (Hawtrey) and to maintain that rate of interest which equalises the value of investments and the volume of savings (Hayek).
Monetary remedies of business cycles, which may be applied by the Central Bank of a country, can be divided into two types:
(i) Measures for the regulation of the volume of credit money, and
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(ii) On appropriate interest policy. Within the first group will come variation of bank rate, open market operations and all other weapons in the hands of the Central Bank?
The second type of remedy contemplates raising the bank rate in times of boom so that the volume of new investments is reduced and lowering the bank rate in times of boom so that the times of depression so that new investments occurs.
Remedy # 2. Cyclical Fluctuations:
In former times monetary policy was regarded as a major weapon against cyclical fluctuations. Keynes is very sceptical about the efficiency of monetary policy. Credit control measures can remedy business cycles only if businessmen’s actions are based upon credit expectation and the rate of interest.
According to Keynes, they are not high interest rates do not reduce investments if profit expectations are high. Similarly, low interest rates do not necessarily encourage investment. Businessmen will not borrow, even at zero rates of interest, if there is no expectation of profit, therefore, business cycles cannot be eliminated merely by varying the rates.
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Keynes argues that business cycles are not due to monetary causes but of fluctuations in the marginal efficiency of capital. Business cycles can only be eliminated by securing full employment through a judicious policy of investment, but, although monetary policy cannot cure business cycles, it is not entirely useless.
Keynes admits that a suitable monetary policy can assist the attainment of full employment by maintaining the rate of interest at a low level. Low interest rates encourage investment and investment increases employment.
Remedy # 3. Increase of Buying Power:
Writers, who believe that under-consumption and over-saving lie at the root of business cycles, suggest that they may be eliminated by increasing the buying power of the masses. Hobson recommends raising wage rates in time of boom so that a greater part of the national income may go the labour. He also recommends reduction of inequality of wealth.
Many quack remedies have been suggested for increasing buying power. For example, Major Dauglas and his social credit school recommended that the government should subsidise consumer purchases by printing new money.
Remedy # 4. Direct Controls:
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There are certain methods of control (including physical controls) undertaken by the Government. Some examples are Price control, Price support and Rationing.
In order to check a business boom, particularly when it arises during war time, methods of price control and rationing are adopted. But, price control may not be effective during a normal peace time.
Price support is the method which fixes a minimum price on certain goods with a view to prevent prices from falling below a certain minimum, sufficient finance is required to apply the price support method.
Apart from the above means of direct control, unemployment insurance has been prescribed as an effective method of controlling depression and unemployment.
Remedy # 5. Stabiliser:
The term ‘stabiliser’ suggests a process or an attempt to keep equilibrium in the level of national income. Stabilization prevents inflationary and deflationary gaps and aims at achieving moderate business cycles and full employment.
The methods of stabilization can be divided into two groups:
(a) automatic or involuntary and
(b) planned or voluntary.
Within the first group are changes in tax-receipts, unemployment compensation and other welfare transfers, company savings and family savings. Within the second group are fiscal policy and monetary policy. The methods under the second group must be undertaken by the Government and the Central Bank.
Remedy # 6. Forecasting:
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This is a method of measuring the up-swings and downswings of business cycles by the help of past records so that cyclical fluctuations can be counteracted.